Are Boards Getting Shareholders Their Money's Worth? - Reinhart ...

The Global M&A Boom Continues: Are Boards Getting
Shareholders Their Money’s Worth?
By Keith L. Johnson and Cynthia L. Richson
INSTITUTIONAL INVESTORS
Mergers and acquisitions are rife with conflicts
of interest. 1 In addition to the divergent interests of
a target company and acquirer, transactions often
involve conflicting motivations between management
and shareholders, advisors and clients, independent
and inside directors, companies and their
various stakeholders, and inside and outside shareholders.
Among a company’s outside shareholders,
there are also likely to be divergent views between
short-term and long-term investors. Even within
individual institutional investor shareholders, there
may be conflicting interests of public and private
equity portfolio managers or between hedge fund
and long-only portfolio managers.
Moreover, investment banks have been the biggest
beneficiaries of the M&A boom with earnings
soaring at the five biggest investment banks. 2
Critics of public companies that go private allege
that some boards of directors may be accepting
deals for reasons other than best-available price and
that corporate executives are being enriched at the
expense of shareholders. Such criticism has resulted
in increased scrutiny of possible conflicts in private
equity transactions. Even the Delaware Chancery
Court has begun to question the effect that management
conflicts of interest have on negotiation and
approval of transactions where public companies
are being taken private. 3
Despite these conflicts, mergers play a critical
role in the allocation of capital in both the U.S.
and Continental Europe. 4 However, with so many
players pursuing competing agendas, it can be easy
to lose sight of the guiding economic goal that
drives merger and acquisition activity—the creation
of sustainable corporate value for shareowners.
Institutional investors can serve a key role in focusing
all of the merger and acquisition players on
the pursuit of sustainable corporate value creation.
Keith L. Johnson heads the Institutional Investor Consulting
Services section at Reinhart Boerner Van Deuren sc and Cynthia
L. Richson is the Founder of Richson Consulting Group, llc.
Mr. Johnson formerly was Chief Legal Counsel of the State of
Wisconsin Investment Board (SWIB) and Ms. Richson formerly
was the Corporate Governance Officer for the Ohio Public
Employees Retirement System (OPERS).
Viewing transactions from the perspective of longterm
institutional investors, as fiduciaries with an
obligation to serve the best interests of their ultimate
beneficiaries, can provide a clear path through
this jungle of conflicts.
A recent survey of corporate directors found
that almost 62 percent agreed with the statement,
“On balance, mergers and acquisitions destroy
more value than they create.” 5 There are numerous
examples of mergers that have gone very badly 6
and an aggregate wealth loss of $240 billion for
acquiring firm shareholders from mergers during
1998 to 2001. 7 Institutional investors have been
burned and are becoming more skeptical about
proposed transactions. With the recent growth in
merger and acquisition activity, this skepticism may
be healthy. 8
Role of Institutional Investors
As a group, institutional investors have an overwhelming
financial incentive to promote integrity
of the merger and acquisition process and good
corporate governance is beneficial to both stockholders
and bondholders. 9 They own 59 percent of
United States public company stock. 10 Institutional
investor ownership of the largest companies is even
more concentrated, at 69 percent for the Fortune
1000. Pension funds alone own 28 percent of
United States public equities; mutual funds own 20
percent; insurance companies own 9 percent; and
banks and foundations both own less than two percent
each. In addition, pension fund equity assets
tend to be heavily indexed, with over 41 percent
invested passively in index funds. 11 Ownership of
public companies in the United States tends to be
broadly dispersed.
In Canada, public company ownership is more
concentrated than in the United States. About 75
percent of companies listed on the Toronto Stock
Exchange have a controlling shareholder, which
may be a founding family or an institutional investor.
12 Control is often maintained through issuance
of dual class stock, with the controlling shareholder
owning a substantial block of the voting class. 13
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Despite these differences, institutional investors
play a determinative role in the system for corporate
acquisitions in both markets.
The interests of different kinds of institutional
investors, however, can vary considerably. Pension
funds, particularly large public pension funds, are
more heavily indexed and universally invested. 14
This broadly exposes them to market developments
over the long term and predisposes pension fund
managers to take an interest in market integrity
issues and sustainability of corporate performance.
Actively managed mutual fund portfolios, on the
other hand, are more likely to trade often, resulting
in average portfolio turnover of holdings of less
than a year. 15 Accordingly, mutual fund managers
often have a shorter-term view, preferring immediate
profits over building long-term corporate
wealth. Some hedge funds that pursue short-term
strategies have similar interests. Investment managers
that short stock as part of their investment
strategy may even have a vested interest in seeing
declining company fortunes. 16
The impact of these diverging interests was
born out in a 2006 study by Lily Qiu at Brown
University. 17 She reported that acquirers with large
public pension fund shareholders performed relatively
better in the long run than other acquirers
and had fewer value destroying acquisitions. She
also found that mutual fund ownership was positively
associated with future merger and acquisition
activity, and that acquirers with more mutual fund
ownership performed worse in the stock market. 18
Private equity funds are also having an increased
impact on merger and acquisition activity. With
larger amounts of institutional investor money
being allocated to private equity, the number of
companies being taken private in management
buyout transactions bankrolled by private equity
and hedge funds has mushroomed. 19 One of the
results of this “going private” trend has been to
move increases in value achieved in corporate turnarounds
from public to private market investors. 20
Even for institutional investors that participate in
management buyouts through private equity funds,
the net effect of transferring gains to private market
portfolios may not offset the corresponding
losses to the institutional investor’s public portfolios
(including combined index fund and passively
managed portfolio exposure). 21
In response, some public market investors have
begun to fight back against management buyouts. 22
Shareholders filed a lawsuit in New York City in
November 2006 alleging that 13 private equity firms
conspired to fix buyout prices by bidding collusively
in transactions involving three public companies. 23
A related United States Justice Department investigation
is also pending.
Institutional Investor Issues in
Mergers and Acquisitions
The varying interests of institutional investors
result in different views on issues that arise in merger
and acquisition transactions. Understanding these
differences between investors presents both challenges
and opportunities to other transaction participants.
Hot button issues can include the following:
(1) Short-term gains versus sustainable longterm
wealth : Although pension funds and most
of the investors in mutual funds are investing to
meet long term goals, many of the portfolio managers
that serve as the stewards of their assets
operate with a short-term investment horizon that
is driven by competitive pressures. In both the
United States and Canada, pension funds control
more wealth than any of the other institutional
investors. However, many pension fund managers
delegate investment responsibility for large chunks
of those assets to external investment firms, which
are then evaluated on a quarterly basis and paid on
assets under management rather than performance
over any particular time period. This can result in
a disconnect between the long-term interests of
underlying investors and the strategies of portfolio
managers.
Short-term investors are more likely to support
merger and acquisition strategies that emphasize the
creation of immediate gains, even at the expense of
a company’s future health. However, investors that
take a truly long-term view are likely to be more
open to considering the impact of a transaction on
sustainability of performance and support strategic
plans that will build company value over several
years. Where there is a tension between the shortterm
and long-term impact of a transaction, many
institutional investors will want to evaluate how it
fits with their investment horizon. For example, risks
relating to company reputation, future regulatory
changes and product obsolescence may be of more
The Corporate Governance Advisor 26 September/October 2007

concern to long-term investors, particularly those
with index fund exposure to the company. 24
Boards have been accorded wide business judgment
discretion to determine when a company
should pursue long-term strategic business goals
over maximization of short-term returns. 25 They
can use this discretion to align with long-term investors
in pursuing strategic plans to create sustainable
corporate wealth. However, when communicating
about strategic plans with portfolio staff at institutional
investors, companies might need to stress
this fundamental alignment of long-term interests
between the company and the institutional investor’s
clients or beneficiaries.
(2) Alignment of Executive Compensation with
Investor Interests : While change in control payments
were originally intended to remove any disincentive
for target company executives to oppose a transaction
that could cost them their jobs, the payments
have become large enough at many companies to
create an economic incentive for executives to support
a transaction regardless of whether it is in the
best interests of shareholders. In addition, where
executives will receive other compensation from
the acquirer or accelerated vesting of options in
connection with the transaction, change in control
payments may be unnecessary. At their worst, these
payments can add up to huge amounts that appear
to be an inappropriate reward for the company’s
underperformance that lead to the transaction.
In addition, studies have found that the amount
of compensation an executive receives is mostly
related to size of the company. 26 This creates an
incentive for executives of acquiring companies
to undertake acquisitions merely to obtain an
increased compensation award—a disastrous combination
for shareholders when combined with the
poor track record for acquisitions.
Management buyouts can also present the opportunity
for misalignment in payments to executives.
Private equity firms can often offer the executives
added bonuses and options in the new company,
which may not be publicly reported until long after
the transaction has been completed, if ever. 27 The
use of substantial private payments to a company’s
executives in a going-private transaction raises
questions about whether the executives were essentially
“bought off.” 28 In two June 2007 decisions,
the Delaware Chancery Court even temporarily
enjoined acquisitions of Lear Corporation and The
Topps Company because public shareholders were
not informed of the role that personal financial
interests of management at the companies might
have played in favoring private acquisitions. 29
In addition, research indicates that company management,
preceding a management buyout, tends to
record lower than expected accounts receivable and
otherwise engage in financial manipulation to make
company performance look worse. 30 Public shareholders
bear the brunt of these shenanigans.
Companies would be well-served to make any
change in control payments subject to approval by
the shareholders. 31 Greater and more timely transparency
would also help to eliminate (or confirm)
suspicions about the size and extent of executive
compensation related to a proposed change in
control. 32 Boards should make sure they are aware
how large total change in control payments could
be, well in advance of any transaction, in case they
need to be revised. Excessive golden parachute
payments, cash out of options, tax gross ups,
forgiveness of corporate loans, unearned retirement
program contributions and compensation
that rewards poor performance are particularly
objectionable to investors.
(3) Independent Committees and Independent
Advisors : Inside directors, investment banks, compensation
consultants and other advisors involved
in transactions often have conflicts of interest. For
example, payment of a success fee or use of “stapled”
financing where the investment bank advising
the target also provides financing to the acquirer,
gives the investment bank a financial interest in
ensuring success of the transaction. The prospect
of future business from a serial acquirer or private
equity fund could also bias an investment bank
toward ensuring a transaction closes. Fairness opinions
from investment banks with a vested interest in
the transaction are loaded with litigation risk. 33 In
addition, use of compensation consultants that also
do significant work for management could result in
the board receiving biased advice.
Boards could do a better job separating good
from bad acquisitions by making more effective use
of independent board committees and by retaining
independent advisors to review the transaction.
While inside directors may balk at the idea, the
practice is becoming more prevalent. In a recent
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survey of corporate directors, 30 percent said that
they always engage independent board advisors
when contemplating a purchase or sale. 34 An additional
32 percent said that they “sometimes” engage
an independent board merger and acquisition advisor.
35 Fifty four percent of the director respondents
reported having voted down or materially changing
a contemplated transaction.
Retention by the board of an independent investment
banking firm with specialized industry knowledge
can bring a fresh view to evaluation of a
transaction and even identify alternatives. In order
to be truly independent, the firm cannot be paid an
incentive or success fee. Directors could also limit
their legal exposure and the company’s downside
risk by obtaining a (second, if necessary) fairness
opinion from an independent valuation firm. 36 The
board should not place restrictions on the fairness
evaluation (such as unrealistic assumptions) that
will reduce its reliability.
Finally, the success of a merger or acquisition
does not depend solely on making the right decision
up front. Integration planning and implementation
are just as critical. Failure to address
cultural differences and poor strategic planning or
implementation are often cited as common reasons
why business combinations fail. The board’s duties
do not stop once a transaction has been closed. In
fact, companies might want to consider deferring a
portion of the fee of key advisors until integration
plans have been executed. This would move the
focus toward delivery on the promises cited when
the deal was proposed and align advisors with longterm
shareholders. Disclosure of the company’s
advisors’ long-term merger and acquisition success
rate in previous transactions would also be helpful
to both the board and shareholders. 37
(4) Corporate Governance Issues : The quality
of a company’s corporate governance will often be
evident in the way it approaches a potential transaction.
Shareholders and their advisors will be
evaluating the strategic rationale, process fairness,
valuation decisions, conflicts of interest, executive
compensation, use of takeover defenses and company
governance profile to determine the quality
of the company’s corporate governance. This will
be an ongoing process that is done on a case-bycase
basis. Proxy voting consultants usually play
a key role in advising shareholders on transactions
that require a shareholder vote, though
their recommendations may not be determinative
for sophisticated institutional investors that make
their own decisions on merger and acquisition
transactions. Ultimately, shareholders will take
corporate governance into consideration as one of
the factors that are weighed when making a vote or
tender decision. 38
The more confidence shareholders have that
a company’s board is aligned with the interests
of its owners, functioning independent of management
and acting in the shareholders’ best
interests, the more likely shareholders will defer
to the board’s recommendation. Clear communication
with shareholders and their advisors is
vitally important to establishing and maintaining
this kind of trust. It is important that companies
identify where, within the management structure
of their large institutional shareholders, the final
decision will be made on a vote or tender offer and
engage with that part of the organization directly
when issues arise. 39
The following are among the corporate governance
concerns that shareholders assess when considering
whether a board is likely to act in the best
interests of long-term shareholders when evaluating
acquisitions:
• Are anti-takeover devices structured to insulate
management or are they subject to shareholder
approval?
• Does the company have a strongly independent
board or is the board controlled by management?
• Is there a classified board structure that makes it
difficult to change the board?
• Has the company adopted a requirement that
directors receive a majority of the votes cast in
order to be elected?
• Is there a supermajority voting requirement for
approval of takeovers that allows minority or
inside shareholders to block transactions?
• If the CEO is also Board Chair, is there an effective
and independent lead director?
• Do the directors have individually significant
holdings of company equity to align their interests
with shareholders?
The Corporate Governance Advisor 28 September/October 2007

• Are excessive change in control or other gratuitous
executive compensation payment provisions
in place?
• Are executive compensation practices inconsistent
with “pay for performance” principles, such
that it appears the board has been captured by
management or that management incentives are
misaligned with shareholders?
• Have independent advisors been retained to
assist an independent committee of the board in
evaluating the transaction?
• Are success fee payments or other advisor conflicts
of interest present in the transaction?
• Does the company have a history of successful
mergers and acquisitions?
• What is the company’s corporate governance
rating and what do the rating firms view as the
company’s governance weaknesses? 40
• Emerging Trends : Private equity deals have
accounted for more than a third of all merger
activity this year and 40 percent of US M&A
activity this quarter, the highest level ever. 41
Private equity is reshaping the public markets
with new trends such as “stub equity” where
public shareholders can exchange some of their
shares for securities in the new, privately owned
company. 42
Stub equity deals, such as the buyout of Harman
International Industries Inc. by Kohlberg, Kravis,
Roberts & Company (KKR) and Goldman Sachs
Group Inc., have allowed public equity holders
to participate in the upside value inherent in their
equity. However, stub equity typically provides no
shareholder rights to holders and leaves them at
the mercy of the company’s new private equity firm
managers.
In addition, private equity firms such as
Blackstone and KKR are raising money through
initial public offerings of their management subsidiaries,
without making the public disclosures the
Securities and Exchange Commission requires of
Registered Investment Advisors—a feat described
by some as cracking the code on how to function as
a private company in the clothing of a public company.
43 Such structures leave shareholders of the
private equity management companies with little
information and virtually no say in the company’s
management or investment decisions. 44 The funds
generated through these offerings also provide the
private equity firms with additional capital that is
controlled by the managers.
This creation of stub equity holders and private
equity management firm shareholders, both with
economic interests but virtually no governance
rights, provides potential economic advantages for
them while creating new agency risks from the inherent
conflicts of interest they have with the private
equity firm managers. Will the private equity firm
managers find ways to divert value away from stub
equity holders through generation of additional
fees that are paid by the underlying companies to
the management firms? Will they frustrate stub
holders by engaging in balance sheet structuring
that steers earnings away from equity?
One thing is certain, this new private equity
environment will place even more pressure on public
company boards to protect their shareholders
from being taken advantage of in going-private
transactions.
Conclusion
Boards need to be keenly aware of the divergent
interests of different shareholders. They are charged
with balancing those interests in pursuing the
creation of sustainable corporate wealth. Current
evidence suggests that companies have generally not
done a good job in handling mergers and acquisitions.
However, by proactively seeking to develop a
long-term shareholder base, addressing conflicts of
interest, aligning executive compensation incentives
with shareholders and adopting corporate governance
best practices, boards could improve their
merger and acquisition track record. Company
advisors and consultants could also be more effective
in helping to identify transactions that will
build sustainable value.
Notes
1. Robert Kindler, Vice Chairman for Investment Banking
at Morgan Stanley recently said on a panel at the Corporate
Law Institute at Tulane University, “We are all totally conflicted—get
used to it.” Morgan Stanley advised the Tribune’s
special committee of independent directors in the recent sale of
Volume 15, Number 5 29 The Corporate Governance Advisor

the company. Stuart Goldenberg, “When a Bank Works Both
Sides,” The New York Times, April 8, 2007.
2. Net income in the past 12 months at the five largest
investment banks has skyrocketed: Goldman Sachs: 56%,
Morgan Stanley: 68%, Merrill Lynch: 110%, Lehman Bros.:
17%; and Bear Sterns: 31%. John Waggoner, “Investment
Banks Benefit Most from M&A Mania,” USA Today, May
25, 2007.
3. Peter Lattman and Dana Cimilluca, “Court Faults Buyouts,”
The Wall Street Journal, July 12, 2007, citing temporary injunctions
issued by the Delaware Chancery Court in acquisitions
of Lear Corporation and The Topps Company due, in part, to
undisclosed compensation arrangements of private acquirers
with the management of public companies.
4. For the first time, Continental European firms were as
eager to participate as their U.S. and U.K. counterparts in
the fifth M&A wave during the 1990s and M&A activity since
January 1, 2007 is 63% higher than in 2006 on track to set
another record. Mergers and Acquisitions in Europe, Marina
Martynova and Luc Rennenboog, January 2006, SSRN.com;
and “Huge deals fuel record-breaking M&A,” Financial Times.
com, May 7, 2007.
5. Directors and Boards, August Question of the Month, http://
www.directorsandboards,com/debriefing/September2006/
qomaugust2006.html (visited September 5, 2006).
6. For example, Robert F. Bruner, in his book “Deals from
Hell,” cites the AOL Time Warner merger as a champion of
failed mergers, ultimately resulting in a US$200 billion loss
in stock market value and a US$54 billion write-down in the
combined company’s assets.
7. “Institutional Investors’ Trading Behavior in Mergers
and Acquisitions, Rasha Ashraf and Narayanan Jayaraman,
Georgia Institute of Technology, March 27, 2007, available at
SSRN.com.
8 The volume of mergers and acquisitions during the first
nine months of 2006 was at a record US$2.7 trillion. Lina
Saigol and James Politi, “Rise in Hostile Bids Pushes M&A to
Record,” Financial Times, September 29, 2006. According to
Thompson Financial, from 2005 through July 13, 2007 there
have been 1,287 levereged buyouts with a total value of $787
billion. Michael J. de la Merced, “An I.P.O. Glut just Waiting
to Happen,” The New York Times, July 15, 2007.
9. The Impact of Shareholder Power on Bondholders:
Evidence from Mergers and Acquisitions, Angie Low, Anil
K. Makhija, and Anthony Sanders, March 1, 2007, SSRN.
com.
10. The Conference Board, “Institutional Investment Report
2005,” citing ownership as of 2003.
11. Id.
12. Aviv Pichhadze, “Mergers, Acquisitions and Controlling
Shareholders: Canada and Germany Compared,” 18 Banking
and Finance Law Review 341 (June 2003).
13. Id.
14. The Conference Board, “Report of the Commission on
Public Trust and Private Enterprise,” January 2003.
15. Id.
16. A recent study by Bernard Black and Henry Hu documented
a number of instances where hedge funds and other
investors have used swaps, short sales, derivatives, borrowed
stock, hedging and other techniques to acquire voting rights
on acquisitions in which they held no overall economic interest.
The shares were then voted without regard to whether they
believed the transaction would benefit the company. Henry
T. C. Hu and Bernard Black, “The New Vote Buying: Empty
Voting and Hidden (Morphable) Ownership” 79 Southern
California Law Review 811 (2006).
17. Lily Qui, “Which Institutional Investors Monitor? Evidence
from Acquisition Activity,” http://www.econ.brown.edu/fac/lily_qiu
(visited August 13, 2006).
18. Id. A one percent increase in mutual fund ownership was
found to be associated with a reduction of six to 131 basis
points in various 12-month returns, including the transaction
announcement month.
19. Allocation of assets by the top 200 pension funds grew by
14 percent in 2005, to US$97 billion, while allocations to hedge
funds grew 42 percent, to US$30 billion but still amounts to
only about five percent of assets. Pensions & Investments,
January 23, 2006. The number of private buyouts announced
for European companies increased by 320 percent between
2001 and 2005. Jason Singer, “In Twist for Private Buyouts,
Some Shareholders Fight Back,” Wall Street Journal, August
18, 2006. Private equity deals in the United States are on
track to be twice the value in 2006 than they were in 2005.
Anna Driver, “Holders Sue Private Equity Firms Over Deals,”
Reuters News Service, November 15, 2006.
20. For example, the Blackstone Group took Celanese private
in December 2003 in a deal it valued at US$4 billion. One year
later, it was sold back to public investors for US$6.5 billion, with
virtually no changes other than shifting its stock market listing
the United States. Breaking Views, “On Going Private: Investors
Beware,” Wall Street Journal, November 18–19, 2006.
21. For example, where an institutional investor has combined
passive and active portfolio holdings that total four percent of a
company’s public equity and ends up with a four percent stake in
the private equity fund, it is likely that the investor will have lost
at least 20 percent of it’s equity stake in the company to private
equity fund fees and management’s carried interest. If the company
could have been turned around as a public company, the
investor has essentially benefited the private equity fund managers
and company executives at the expense of its own investors
or beneficiaries. However, this loss will be largely invisible if
the investor measures its performance against an index-relative
benchmark. The investor’s private equity portfolio managers will
obtain a nice return, and the public equity portfolio managers
will not be aware of the returns that were transferred elsewhere.
22. Several large investors, including Knight Vinke Asset
Management, fought the sale of VNU to a group of private
equity firms last summer, arguing that the small premium being
offered did not merit leaving the rich profits on the table that
the private equity investors would reap from quickly restructuring
VNU. While the transaction eventually went through, the
shareholders did win an increase in the purchase price. Jason
Singer, “In Twist for Private Buyouts, Some Shareholders Fight
Back,” Wall Street Journal, August 18, 2006.
23. Company transactions involved in the lawsuit are Univision
Communications, HCA Inc. and Harrah’s Entertainment.
The Corporate Governance Advisor 30 September/October 2007

24. Companies with long-term strategies might also want to
undertake proactive efforts to establish a base of shareholders
inclined to take a long-term view. This is one of the recommendations
in the “Report of the Commission on Public Trust and
Private Enterprise” issued by The Conference Board, January
2003.
25. In Unocal Corp v. Mesa Petroleum Co., 493 A.2d 946 (Del.
1985) the Delaware Supreme Court said that boards could
consider the disparate interests of short-term speculators and
long-term investors and authorized boards to even favor longterm
investors over shareholders who wanted a quick profit.
However, once a board has decided to sell control of a company,
they have an obligation to serve as auctioneers and get
the best price for shareholders. See Revlon, Inc. v. MacAndrews
& Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985).
26. Lucian Arye Bebchuk and Yaniv Grinstein, “Firm
Expansion and CEO Pay” (November 2005). Harvard Law
and Economics Discussion Paper No. 533. Available at SSRN:
http://ssrn.com/abstract=838245.
27. For example, in the Celanese management buyout, the
company’s executives are reported to have received optionrelated
compensation that was worth US$65 million when the
company went public again, on top of salaries and bonuses.
Breaking Views, “On Going Private: Investors Beware,” Wall
Street Journal, November 18–19, 2006. In addition, the AFL-
CIO recently challenged the proposed IPO of the Blackstone
Group and the private equity firm’s claim that it is not an
investment company so it can sell its shares to the public
without being regulated by the Securities and Exchange
Commission under the Investment Company Act of 1940.
“Union Takes Aim at Blackstone I.P.O.,” The New York Times,
Dealbook, May 16, 2007.
28. The California Public Employees Retirement System recently
opposed a merger of United Health Group with PacifiCare
Health Systems unless the companies held a shareholder vote
on proposed executive bonuses to be paid in the transaction.
In 2005, Molson reduced change in control payments to satisfy
shareholders before its merger with Adolph Coors.
29. After listing the financial advantages offered to management
by a private acquirer, the Delaware Chancery Court
concluded, “Put simply, a reasonable stockholder would want
to know an important economic motivation of the negotiator
singularly employed by a board to obtain the best price for the
stockholders, when that motivation could rationally lead that
negotiator to favor a deal at a less than optimal price, because
the procession of a deal was more important to him, given his
overall economic interest, than only doing a deal at the right
price.” In Re: Lear Corporation Shareholder Litigation, C.A.
No. 2728-VCS (June 15, 2007). The deal was subsequently
rejected by Lear shareholders. See also In Re: The Topps
Company Shareholders Litigation, C.A. No. 2786- VCS (June
14, 2007).
30. Carol A. Marquardt and Christine I. Wiedman, “How are
Earnings Managed? An Examination of Specific Accruals,”
Contemporary Accounting Research, Vol. 21, No. 2, Summer
2004.
31. On April 20, 2007, the U.S. House of Representatives
passed “The Shareholder Vote on Executive Compensation
Act” by a vote of 269–134., which is also applicable to merger
and acquisition transactions. http://financial services.house.
gov/ExecutiveCompensation.html. The bill will move next to the
Senate Banking Committee.
32. In management buyout situations, outside shareholders
would benefit from obtaining full knowledge of all consideration
that is or will be paid to management. The conflicts of
interest associated with management participation in a buyout
from outside shareholders are especially troublesome.
33. The National Association of Securities Dealers has been
investigating concerns about conflicts of interest in the issuance
of fairness opinions. It has proposed a disclosure-based
approach to highlighting conflicts which many view as inadequate
to address the fundamental flaws associated with using
conflicted financial advisors. Federal Register, Vol. 71, No. 69,
April 11, 2006.
34. Directors & Boards, “The Directors & Boards Survey:
Mergers & Acquisitions,” Boardroom Briefing, Fall 2006.
35. Id. The most common independent advisors directors
reported using were the board’s law firm (31 percent), the
board’s own M&A firm (27 percent) and the board’s accounting
firm (27 percent).
36. For example, recent deals where independent fairness opinions
were obtained include sales of May Department Stores,
Albertsons, Constellation Energy, Sungard Date Systems,
Dex Media and Texas Instruments’ sensors and controls business.
See Jeffrey Williams, “What Directors Need to Know
About Fairness Opinions,” Boardroom Briefing: Mergers &
Acquisitions, Directors & Boards, Fall 2006.
37. An analysis done for the New York Times by Capital IQ,
a business unit of Standard & Poors, shows that the track
record for buyer performance after a major acquisition varies
substantially between investment banks involved in advising
buyers. “ They’re All No. 1, but Are They Worth It?” The New
York Times, Dealbook, August 5, 2007.
38. Institutional investors that are not happy with a proposed
transaction may publicly oppose it. For example, the California
Public Employees Retirement System recently opposed a merger
of United Health Group with PacifiCare Health Systems
because of executive bonuses to be paid in the transaction.
39. Some institutional investors will delegate responsibility to
their external investment managers and some will retain final
authority, with decisions made by the chief investment officer,
portfolio manager, proxy voting administrator or other officer.
40. Several shareholder advisory firms (e.g., Institutional
Shareholder Services, Governance Metrics International and
The Corporate Library) evaluate and rate companies on their
corporate governance.
41. Dana Cimilluca, “Private Equity Fuels Record Merger
Run,” Wall Street Journal, July 20, 2007.
42. Dennis Berman, “Unusual Buyout Offers a Piece to
Shareholders,” Wall Street Journal, April 27, 2007.
43. Henry Sender and Monica Langley, “How Blackstone’s
Chief Became $7 Billion Man,” Wall Street Journal, June 13,
2007.
44. Dennis Berman, “Latest Trend in Big Buyouts: Blend of
Public, Private Traits,” Wall Street Journal, May 22, 2007.
Volume 15, Number 5 31 The Corporate Governance Advisor